If this sounds familiar, no need to hang your head in shame—it’s your lucky month! April has been declared National Financial Literacy Month, so what better time to brush up on investing basics? Read on, and at minimum, you’ll be able to hold your own in ego-centered investment conversations. But more importantly, you’ll be laying the foundation for a sturdy portfolio of your own.
So let’s address a basic question—what is a stock? If you’ve ever heard of the United States, you probably know that private companies play a big role in its wealth. Let’s say you would like a piece of that pie. Perhaps you’ve noticed that Microsoft seems to be doing rather well for itself. Sure, a lot of companies aren’t doing too hot right now, but all in all, Microsoft appears to be making lots of money. And you figure, "Hey, I like money. In fact, I’d like to have more money." So when you buy a share of Microsoft’s stock, you are basically buying a little sliver of Microsoft. That’s right; you own a little, itty, bitty chunk of Microsoft. Perhaps something equivalent to a secretary’s paper clip at headquarters. Now, because you are a shareholder in the corporation, you are entitled to a little, itty bit of its profits.Let’s get technical for just a second. Assume that you bought 1000 shares and each share cost you twenty bucks, so you have $20,000 of your hard-earned money invested in Microsoft. When business is booming, you’re feeling pretty good. And because things are going so swimmingly, people are now willing to buy your shares at $25 per share—(the share price has increased). If you sell, you’ll get $25,000 for those shares, and can now go buy 5,000 things from the dollar store with your profits. This share price can change throughout the day. If a company is doing really well and people be-lieve it will continue to do well, then the price of that stock generally goes up.
But what if Microsoft doesn’t do well? What if Steve Jobs introduces the iPad 5000 that can surf the web and make you a sandwich, and people buy Apple products instead of Microsoft? You would still be able to sell your stock, but people may only be willing to pay $15 per share. That $20,000 you invested is now only worth $15,000. If you were to sell, you would lose money in the stock market. Ever heard of that happening? So if you’re wondering why people talk about the stock market almost as much as they talk about Lindsey Lohan, it’s because they are either losing their money or raking it in.
And what are people talking about when they mention the Dow, the NASDAQ, or the S&P 500? It’s likely that they are trying to sound impressive, but these are called indexes—or as some like to think of them: lists of companies. The Dow, a nickname for the Dow Jones Industrial Average, essentially tells you how well a list of certain companies is doing. Different indexes will tell you different things. For instance, the S&P 500 will estimate how well (or not well) 500 of the largest U.S. companies are doing at any given time. The Dow has 30 companies, while the NASDAQ Composite contains about 3,000 components. People use these indexes to estimate how certain areas of the economy are doing. All right, so what does this have to do with you? Believe it or not, you can actually make a lot of money using the stock market if you go about it the right way. It’s not some get rich quick scheme; in fact, it’s more of a get rich slowly kind of deal. Unfortunately, one newsletter is not nearly enough room to scratch the surface of investing basics, but you’re heading in the right direction. Stay tuned for next month’s newsletter, and in the meantime, go ahead and hop into those coworker conversations with confidence.
